Monday 22 March 2010 17.00 EDT
First published on Monday 22 March 2010 17.00 EDT

When you watch Alistair Darling's Budget tomorrow, don't think about the growth forecasts and tax rises, and don't – unless you enjoy feeling anxious – spend too long pondering the size of the public debt. No, consider for a moment how the British economy resembles a giant panda.

This is the notion that chance decisions made way back can lock a person, industry or entire country into an inefficient course they would never subsequently have chosen. Or, as Beattie rather cruelly puts it: "The giant panda's problem is that it went down an evolutionary cul-de-sac and has now found it too late to reverse."

What economies call path dependency is entirely man-made. Take the keyboard I am using to write this. The QWERTY layout was not designed to make typing faster – precisely the opposite. As Paul David, the godfather of path-dependency theory, points out, the keys on mid-19th-century versions of the typewriter would jam if struck too fast – so the most frequently used letters were spaced apart to slow down typists. The mechanics at Remington then promoted the letter R to the top, and thus, assembled on one row, were all the keys needed by any salesman hoping to woo customers by quickly pecking out the brand name: TYPE WRITER.

Even after the mechanical problems were sorted out, the QWERTY keyboard still became the standard among manufacturers and customers. A bunch of chance factors thus combined to make an uncomfortable and inefficient keyboard the industry norm.

And that, in a nutshell, is how path dependency works. Other economists have argued that Betamax was a technical superior format to VHS – it's just that video stores stocked more of the latter, so customers bought VHS recorders. The theory applies to geography too: when William Hewlett and David Packard came out of Stanford University in the Great Depression, they decided to set up shop nearby in what was then called Santa Clara County. Easy access to engineering graduates, and to supplies, drew in more and more technology entrepreneurs so that, by the mid-70s, Santa Clara had become better known as Silicon Valley.

All of which brings us back to this week's Budget. Because while the arguments around what the chancellor should do tomorrow have focused on spending cuts – when to make them, how big they should be – it's clear that what any government really has to do, in successive budgets, is sort out the UK's own path-dependency situation: the economy's dominance by the City of London.

During this decade's long boom, Cityphilia didn't look like much of a problem – at least, not to those sat in Whitehall. After all, financial services contributed well over a quarter of all corporation tax and, in the final bubbletastic months before the credit crunch, accounted for nearly 50% of the quarterly growth in national income. As chancellor, Gordon Brown would regularly tell the banks they had made Britain "a new world leader". Which is precisely why the policy-makers didn't want to ask too many questions about what investment bankers were up to.

Brown is not a natural Cityphile, and there was no conspiracy to elevate the City above all other industries (path dependency doesn't work like that). But the effect was the same: manufacturers like a weak pound as it makes their goods cheaper abroad, while the City prefers a strong pound that holds down inflation. The bankers' argument came to look like economic good sense, with the result that more than a million manufacturing jobs were lost in the decade after Tony Blair took power.

Only now, in the wake of the biggest banking crisis since 1929, does it seem that this economic policy has led the UK down a panda-like cul-de-sac. Academics at the Centre for Research on Socio-Cultural Change at Manchester University recently totted up what more than a decade of betting everything on the banking sector, while allowing other industries to be hollowed out, had yielded. They found that London and the south-east had over 40% of all jobs in Britain's world-beating finance industry; the north-east and Wales had less than 6% of all finance jobs between them. Did these hollowed-out industrial regions have much in the way of other new, private-sector jobs? No: they are now largely reliant on the state to provide new employment.

Economies aren't like pandas, of course: they can change path. But it takes a long time and a lot of effort. Alistair Darling can't do any more tomorrow than push the UK a little bit in the right direction – say, by announcing a new green investment bank to help fund companies and jobs outside the City and north of the Watford Gap. The real test of his Budget, however, will be whether he even tries.